China-based Huawei Technologies is in 'a constant state of revolution'. “Not in the old communist style of revolution,” says James Lockett, the company's vice-president and head of trade facilitation and market access. But constant evolution is necessary in the ICT business. “Yesterday’s ideas can quickly become today’s liabilities and tomorrow’s bankruptcies,” he adds.
Consequently, the telecommunications supplier focuses on technologies and innovation. In fact, Huawei was one of the first major companies in China to protect its innovation. As a result, Huawei serves 45 of the 50 biggest international telecom operators and is the third largest smartphone manufacturer in the world. Last year, Huawei shipped 75 million smartphones globally.
To expand its footprint, the company opens an average of 10 offices and facilities in countries around the world every year. Currently, Huawei is present in 170 different countries. Two years ago it was in 150. “Huawei is a very independent company, but operates in a global trade ecosystem,” says Mr Lockett.
In 2002, Huawei’s business started to take off. Key to facilitating its growth was China’s entry into the World Trade Organization in 2001. Also benefiting Huawei was an update to the organisation’s 1996 Information Technology Agreement (ITA), which, thanks to a bilateral deal between the US and China inked in 2014 and confirmed by 54 other signatories in 2015, has expanded the scope of the agreement to take into account the numerous technological advances that have taken place since 1996. This has resulted in complete tariff elimination on many, if not most, of the hi-tech goods Huawei ships into and out of China, saving the company millions of dollars in tariff outlays every year.
“Last year we also imported into China at a rate that reduced the cost of many of our parts and components,” says Mr Lockett. “We imported about $7bn in components from the US last year and we imported about $3.4bn-worth of components from the EU. This is out of $45bn in total sales at a lower cost because of the updated ITA.”
While Huawei is committed to expanding around the world, the firm takes a local approach to every market in which it operates, hiring a substantial local workforce. “This takes time, especially because so much of our company is engineering driven,” says Mr Lockett. “We typically begin with some Chinese engineers and Chinese management.”
But the firm quickly replaces its Chinese engineers and management with local employees who speak the indigenous language and understand prevailing market conditions. “The company has learned that it needs to invest at a local level,” says Mr Lockett. “So we partnered with industry associations, particularly in the ICT sector, country by country.”
Generally, the company finds it takes about three to five years to realise commercial success in a new market. “We set up in a country, get established, train local people, build brand awareness, make contacts and so forth,” says Mr Lockett. “It’s a long-term commitment.”
The company particularly benefits as it is privately held and owned by about 80,000 of its 170,000 workers. Huawei is not a state-owned enterprise. In fact, 77% of its debt comes from outside China. “Economic indicators show private companies quite considerably outperform [state-owned enterprises],” says Mr Lockett.
Huawei’s largest manufacturing base, however, is located within China. While wages are increasing in China, particularly in cities along the country's east coast, Mr Lockett stresses that Huawei’s location close to Shenzhen gives the company important economies of scale.
The company employs 170,000 workers worldwide, 68,000 of whom are involved in R&D. Nearly 70% of that workforce is outside China and is backed up with primarily Chinese engineers.
Huawei operates 18 different R&D centres worldwide. While it has a presence in California’s Silicon Valley, the company is more focused on Europe – Huawei’s biggest overseas market.
“We have a mathematics centre in Russia, a mobile phone design R&D centre in London, another R&D centre in Italy, another in Sweden and another – our first – in Bangalore, India,” he says. “We’ll go anywhere where smart people are willing to work for Huawei.” The company also has operations in Poland.
Huawei places major emphasis on R&D. Every year the company invests upwards of 10% in R&D, largely because of an industry shift from 4G to 5G technology and the radical shift towards the Internet of Everything. Mr Lockett says: “5G technology will be 66 times faster than 4G.”
Well-managed supply chains factor into this fast-moving industry. Huawei partners with six regional supply centres around the world: Mexico, Brazil, Hungary, Dubai, India and China. While the centres in Brazil, Hungary and India also operate as assembly production centres, for most products or assemblies the vast majority of assembly is still done in China, and then parts or kits are sent to supply centres. Customisation of Huawei equipment for local markets is performed in Mexico, Dubai and especially India.
Huawei’s criteria for site selection varies, depending on whether the company is investing in an R&D facility or assembly centre. “We obviously look for universities and research institutes,” says Mr Lockett. But also important are cost-competitive locations that offer good rule of law, excellent infrastructure and support systems.
According to Mr Lockett, the UK, in particular, does a good job at pitching and meeting these criteria. He emphasises, however, that most countries in which Huawei operates are predominantly interested in the company opening a manufacturing plant.
“That’s completely impossible,” says Mr Lockett. “A company our size with an ICT product has to have very large economies of scale and build very few manufacturing plants around the world.”
In fact, one country in Asia that pitches to Huawei requires that the company should source major parts of its components there, despite the fact the country does not manufacture any of the components Huawei needs.
Security issues are another factor that impact Huawei’s site-selection decisions. This has been a particularly prevalent factor when considering the US where, initially, Huawei was barred from locating due to national security reasons. Yet after spying issues were leaked surrounding the US National Security Agency, Mr Lockett explains the dynamics of that debate flipped to the point where US companies are restricted in many overseas markets due to security concerns.
Consequently, Huawei finds the political environment towards Chinese ICT companies investing in the US “still very tainted and actively anti-Chinese”. Mr Lockett, himself an American citizen and former government lawyer, says: “That’s why Huawei is focused on Europe, where we have found a far more rational and more reasonable approach.” He hopes, however, the US will eventually allow Huawei into that market.
“Huawei’s big hope is to be completely transparent and be the first to develop the best 5G technology,” he says. “We hope that at that point the US will allow us in because they need us. That’s a driver for the company – to be number one, to be something that is just needed.”